We all know that entering the world of lending can be daunting, whether it be for personal or business purposes. Lending transactions are full of jargon and in this article I hope to try and explain a few common terms.
When acting for you we will go through the process with you step by step and make sure you understand the documents you are entering into.
To assist with this, we have put together a list of 16 commonly terms used in lending:
- Amortization/Amortisation: The process of paying off a loan over time in regular instalments of principal and interest. Each payment reduces the outstanding balance.
- APR (Annual Percentage Rate): The annual cost of borrowing money, including fees and interest. It gives borrowers a clearer idea of the total cost of the loan over a year.
- Collateral or Security Property: An asset pledged by the borrower to secure the loan. If the borrower defaults, the lender can take steps to take control and dispose of the collateral. For example, a house is collateral or security for a mortgage. Many types of assets can be secured, for example cash in bank accounts, or proceeds of insurance or life polices.
- Default: Failure to repay a loan according to the agreed terms, often leading to penalties, higher interest rates, or legal action.
- ERC (Early Repayment Charge)/Exit Fee: This is an additional payment that may be required by a lender should you decide to repay a loan in full before its final repayment date. ERCs are commonly imposed before the end of any fixed rate period forming part of a loan term. Effectively they compensate the lender for the interest the lender loses out on by early repayment. ERCs should be clear from the terms of any loan offer you receive. Exit fees are often seen in development finance transactions.
- Fixed-Rate Loan: A loan where the interest rate remains constant throughout the term of the loan, making monthly payments predictable.
- Grace Period: A set period after the due date of any payment due to the lender during which the borrower can make a payment without incurring a late fee or penalty.
- Interest: The cost of borrowing money, typically expressed as a percentage of the principal. It is the lender's charge for the privilege of using their money.
- Loan-to-Value Ratio (LTV): A measure used by lenders to assess the risk of lending. It is the ratio of the loan amount to the value of the asset used as collateral.
- Principal: The original sum of money borrowed or the amount of the loan that is still owed, excluding interest. Principal may also be referred to as capital.
- Refinancing: The process of replacing an existing loan with a new one, often with more favourable terms (for example - lower interest rates or extended repayment terms).
- Secured Loan: A loan that is backed by collateral, reducing the lender's risk. Loans are most often secured via property, using a deed known as a Legal Charge or Legal Mortgage against your property.
- Term: The duration over which the loan must be repaid. This could be expressed in months or years, depending on the loan type.
- Underwriting: The process lenders use to assess the risk of lending money to a borrower. It involves evaluating the borrower’s creditworthiness, income, and assets. This can also be referred to as the credit approval process.
- Unsecured Loan: A loan that is not backed by collateral and typically comes with higher interest rates due to increased risk for the lender.
- Variable-Rate Loan: A variable loan rate is one where the interest rate is usually pegged to another rate of interest, say for example that lender’s “standard rate” or the Bank of England Base Rate. This means the interest could go up and down during the loan term. Some longer term loans may start with a fixed rate and then move to a variable rate after a certain number of years.
These terms are used frequently across all types of lending. You will likely hear these terms from the very start of your journey into borrowing or lending money so it is will be helpful for you to become familiar with them.
At Wright Hassall we pride ourselves on making sure you understand the ins and outs of any transaction on which we are instructed. However, we expect our clients to ask us questions about the legal terms used in transactions and we are always happy to explain the process.
It’s also important for you to be confident you are getting the right deal, from a commercial perspective. Instructing a good financial adviser or commercial mortgage broker is a key part of the process. We will work with your adviser to ensure a smooth transition through from instruction to payment of funds.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
